Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It can lead to a decrease in aggregate demand.
B
It results in no change in aggregate demand.
C
It increases aggregate demand by an equal amount to the initial government spending.
D
It leads to higher interest rates which dampen investment.
Understanding the Answer
Let's break down why this is correct
Answer
In Keynesian economics, a balanced budget means that the government spends exactly what it earns in revenue, with no deficit. The balanced budget multiplier effect suggests that when the government increases spending and raises taxes by the same amount, the overall economy can still benefit. This happens because the increased government spending directly stimulates demand for goods and services, while the tax increase might have a smaller negative effect on consumer spending. For example, if the government spends $100 million on building roads and raises taxes by $100 million, the construction jobs created can lead to more people earning money and spending it, which boosts the economy. Therefore, even with a balanced budget, the economy can grow because the positive impact of government spending can outweigh the negative impact of tax increases.
Detailed Explanation
When the government spends money, it puts more cash into the economy. Other options are incorrect because Some might think that spending less means less demand; It's a common mistake to think that a balanced budget means nothing changes.
Key Concepts
fiscal policy
Keynesian economics
multiplier effect
Topic
Balanced Budget Multiplier Effects
Difficulty
hard level question
Cognitive Level
understand
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